Is Emission Fees A Good Policy To Correct Externalities?
In order to avoid some of the pitfalls of direct controls, many economists have suggested that environmental policy rely more on economic incentives than on government commands. One approach is he use of emissions fees, which would require that firms pay a tax on their pollution equal to the amount of external damage. If Dirty Light and Power were imposing external marginal costs of $35 per ton on the surrounding community, the appropriate emissions charge would be $35 per ton. This is in effect internalizing the externality by making the firm face the social costs of its activities. In calculating its private costs, Dirty Light and Power would find that an additional ton of pollution would cost it $5 of internal costs to the firm plus $35 in emissions fees, for an overall marginal cost of $40 per ton pollution. What about the case of emission fees? Say that the government charges the firm $35 per ton. In effect, this means that the marginal private benefit of abatement would go from $
